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Gwenn Ael Gautier wrote:
> You trade ten stocks for every quarterly expiry,
> and your average trade is about $1200 in profits... you are
> losing $3500 at the moment.
> Option1: Take immediate loss of $3500, and wait for expiry to move on to
> next stock.
> Option2: Manage the position...(and forego the possibility to trade
> another stock that meets criteria),
> knowing you have 40% chances to end up losing only $1900 in three months
> (ie recoup $1600), and that if it doesn't work out still, you'll be down
> $4500, (at which point you might still roll your position to the next
> expiry)
I don't trade or sell options, so I can't respond to your survey officially,
but this shouldn't be hard to figure out. Let's leave risk aside here and
simply compare the expected returns:
OptionA: (3500) + 1200 = (2300)
OptionB: [(1900).4] + [(4500).6] = (3460)
On top of that, option B is riskier, but it's not even close anyway. BTW,
the 1200 in OptionA comes from the expected return of a new position, which
was given, which would be the opportunity cost of B. If you know that NO
other position was tradable with this capital, and there really wasn't
anything else to do with it besides put it under the mattress <g>, then A
would still be preferable, since the expected returns would be about the
same, with the higher drawdown potential being the deciding factor.
Regards,
A.J.
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